Why does the government keep running loss-making public enterprises?

Because the people who benefit from keeping them open are not the people paying for the losses.

Before asking why loss-making enterprises stay open, it helps to understand why Public Sector Undertakings (PSUs) exist at all. Some sectors have enormous capital requirements and limited scope for returns, so they attract little private investment. Many PSUs were also created after Independence to generate employment and signal economic self-reliance. From the government’s point of view, then, a loss-making PSU is not automatically pointless. It may still be providing something that private firms will not. The harder question is why governments persist with these enterprises even when the original justification no longer holds and private competitors already operate in the same sector.

The numbers tell part of the story. According to the Department of Public Enterprises’ 2023–24 survey, 58 of India’s 272 operating central PSUs posted net losses totalling Rs. 21,000 crore in a single year. That money comes from taxpayers. But spread across hundreds of millions of people, no individual loses enough to make fighting back worthwhile. Imagine 50 paise vanishing from your account each month. You would not notice. Yet 50 paise from every Indian adds up to an enormous sum. This is the asymmetry at the heart of the problem, often called the problem of concentrated benefits and dispersed costs: the gains from keeping a loss-making PSU alive are concentrated among a small, organised group with every reason to lobby hard. In contrast, the costs are scattered so thinly that no one is motivated to resist.

This plays out visibly with unions. In the past, when governments have tried to disinvest from PSUs, employee unions have organised nationwide protests. Any government that moves toward privatisation faces resistance from all sides at once.

Bureaucratic incentives also affect the possibility of change. Ministries that oversee PSUs derive budgets and institutional weight from them. Wind down an enterprise, and the department supervising it shrinks too. Officials thus acquire a personal stake in keeping these firms alive, independent of any judgment about whether the firms are worth keeping.

Loss-making PSUs survive, then, not because decision-makers fail to see the problem but because the incentive to act on it is weak. The people who would gain from reform are many and dispersed. The people who would lose are few and organised. In politics, that is usually a decisive imbalance.